Owner's Misrepresentation Justified Lease Termination

Facts: A fast-food restaurant signed a five-year lease with the owner of a building that had been used previously for a similar restaurant. Under the lease, the owner represented and warranted to the tenant that there were no existing restrictions, building and zoning ordinances, or other laws or requirements of any governmental authority that would prevent the use of the premises for the tenant’s purposes. The lease also provided that any misrepresentation or breach of such warranty would entitle the tenant to terminate the lease.

But when the tenant sought a building permit from the city to make renovations to the building, it was told it would have to apply for a special use permit to operate a fast-food restaurant with a drive-thru there. After a one-year special use permit that was too restrictive to allow the tenant to operate its business the way it anticipated was granted, the tenant informed the owner that it would not move into the building or pay rent.

The owner sued the tenant. The tenant claimed that the owner materially breached the lease by falsely informing it that there were no zoning laws restricting the operation of a fast-food restaurant on the leased premises. A trial court awarded damages to the owner. The tenant appealed.

Decision: A Wisconsin appeals court reversed the decision of the lower court.

Reasoning: The appeals court found that the tenant’s early termination of the lease was justified by the owner’s misrepresentation that a free-standing, fast-food restaurant was permitted under the existing zoning regulation. The owner argued that he didn’t make a false representation of a zoning restriction, because the lease doesn’t set forth the intended use of the building as a fast-food restaurant. He pointed out that the tenant was free to operate a sit-down type of restaurant without obtaining a special use permit, and therefore, it wasn’t prevented from using the building for the sale of fast food, the permitted use set forth in the lease.

The appeals court disagreed. It stated that the representation and warranty that there were no existing restrictions or zoning ordinances preventing the use of the building for a fast-food restaurant was false from the moment the parties signed the lease. It noted that the fact that the tenant was granted a one-year special use permit doesn’t change that the representation was false. The tenant was entitled to terminate the lease because the owner’s misrepresentation that there were no zoning restrictions was false.

• Tufail v. Midwest Hospitality, LLC, August 2012